Last week was undoubtedly the most action-packed since the scandal enveloping Enron Corp. surfaced last fall, opening with the release of a scathing internal report that identified a corporate climate rife with self-dealing and self-enrichment schemes by Enron top officers, and closing with former CEO Jeffrey Skilling’s stunning testimony before Congress that he “unequivocally” believed Enron was on solid financial footing when he left the company in August 2001. He further disavowed knowing the controversial off-the-book partnerships that led to Enron’s collapse were intended to hide debt and inflate earnings.

This week could be as equally climactic. As of late Friday, former Chairman Kenneth L. Lay had not alerted Congress that he intended to assert his Fifth Amendment right against self-incrimination when he comes before the Senate Commerce Committee on Tuesday. Sen. Byron Dorgan (D-ND) said he saw this as an encouraging sign that Lay would testify, a committee spokesman told NGI. But Dorgan cautioned that Lay, who is under a subpoena to appear, has until late Monday to inform the committee of his intention. A Lay spokeswoman said he was still reviewing his options for the Tuesday hearing.

Last week, Skilling stole the show on Capitol Hill. When he resigned on Aug. 14, 2001, “I absolutely and unequivocally thought the company was in good shape,” he testified before a packed House hearing Thursday and under intense media glare. “I fervently believed that Enron would continue to be successful in the future.”

Enron’s financial statement “as far as I knew, accurately reflected the financial condition of the company,” Skilling told the House Energy and Commerce Committee’s oversight and investigations subcommittee, during one of the marathon Enron proceedings that were held on Capitol Hill last week. He wasn’t aware of any “imminent financial peril” facing the energy trader.

Skilling, who faced unfriendly, almost-hostile lawmakers, attributed Enron’s failure to a “classic run on the bank…a liquidity crisis spurred by a lack of confidence in the company.” At the time of Enron’s collapse, he said, “the company was solvent, the company was highly profitable enough, but apparently not liquid enough.”

House lawmakers found it incredulous that Skilling, as CEO of a Fortune 500 company, didn’t see any cracks in Enron’s financial armor at that time, when several lower level employees saw large fissures forming, and warned management that the company was about to “implode” due to its involvement in questionable off-the-book partnerships, lack of corporate controls and accounting irregularities.

Rep. Edward J. Markey (D-MA) pointed out that Skilling’s resignation coincided with a letter from Enron employee-turned-whistleblower Sherron Watkins to Lay in which she spelled out the deep financial and accounting problems facing the company. She said “she thought Skilling would rather abandon ship now than resign in shame two years later. This woman, down deep in the company, knows all these problems, everything that’s going on; and you’re sitting here and saying that as the CEO, you just decided to resign on that day and didn’t know about those problems. It’s hard to believe, Mr. Skilling, given your reputation for competence and hands-on knowledge, and the fact there is plenty of evidence that other people throughout the company knew that there was a big problem, not just one big problem, but multiple problems.”

Two current Enron executives, senior attorney Jordan Mintz and President and COO Jeffrey McMahon, said they either met with Skilling to personally discuss their partnership concerns, or sent memos to him months before Skilling left Enron.

Subcommittee Chairman James Greenwood (R-PA) noted that both Skilling and McMahon had taken an oath to tell the truth to the House panel. “I can believe him [McMahon], or I can believe you, but there’s no way in hell I can believe both” men’s accounts of a critical March 16, 2001 meeting. McMahon recalled he complained to Skilling about then-CFO Andrew Fastow at the meeting, saying he wore two hats and that he was forced to negotiate with Fastow on Enron matters — that Fastow was acting as if he were McMahon’s boss. Skilling said he only recalled talking about McMahon’s compensation.

Mintz also said he tried to meet with Skilling to discuss the partnerships and Fastow, but he was unsuccessful in his efforts. He told the House panel he sent memos to Skilling identifying his concerns, but Skilling said he didn’t recall receiving or seeing them.

Skilling defended Enron’s use of the private partnerships, which are known as special purpose entities (SPEs), saying they are “commonplace in corporate America,” and are effective financial vehicles, if used properly, for shifting risk from a company’s shareholders to others who have a “different risk-reward preference.”

But many insist that Enron grossly misused and distorted the SPEs — some of which were named LJM, Jedi and Chewco — to hide its debt, boost earnings and line the pockets of its executives over the years, and that this led to the company’s spectacular collapse and descent into bankruptcy in December.

When pressed by Greenwood as to how he couldn’t have known about the details of the SPE partnerships, Skilling replied that Enron “was an enormous [multinational] corporation,” and that he relied upon the advice of employees who were experts in their fields.

With respect to the LJM partnerships, “I believed at that time there were adequate controls in place to manage [the] conflict of interest” inherent in Fastow’s dual roles as manager and investor in the transactions, and that “the controls were being complied with,” he said during the day-long subcommittee hearing. Fastow walked away with $30 million as a result of his involvement in LJM.

Skilling claimed that it was the responsibility of Enron Chief Risk Officer Richard B. Buy and Chief Accounting Officer Richard Causey to approve the partnership deals, and to ensure they were arms-length transactions and that proper controls were in place. But Robert Jaedicke, chairman of the board’s Audit and Compliance Committee, testified that the corporation’s rules required Skilling, as well as Buy and Causey, to okay the deals.

In contrast to Skilling, Enron’s Mintz and McMahon said they saw few controls over Fastow’s activities. They characterized him as a loose cannon within Enron, who had the carte blanche blessing of Skilling. Those who dared to criticize Fastow they said were either ignored, transferred to other departments or fired.

Skilling further disputed claims that he dumped his stock when he left Enron. Skilling said he owned 1.1 million shares when he became CEO in January 2001, and had 940,000 shares when he departed Enron. He continues to insist he resigned from Enron for personal reasons, not because he saw the writing on the wall.

“I was immensely proud of what we accomplished” at Enron, he said. “We believed that we were changing an industry, creating jobs, helping to resuscitate an ailing energy industry.” But after thousands of employees have lost their jobs, investors have lost their money, and “my best friend” former Enron Vice Chairman J. Clifford Baxter has taken his life, “it all looks very different.

“As I sit here today, I am devastated by and apologetic about what Enron has come to represent,” he told House lawmakers last Thursday. “I know that no words can make things right, too many people have been hurt,” Skilling said, adding that he came before the House panel because he felt employees, shareholders and the public had a right to know what happened. “I have done all I can to help this investigation.”

When quizzed about whether he knew why Baxter had taken his life, Skilling said, “I don’t think there was anyone who knew Cliff toward the end, who didn’t realize he was heartbroken by what had happened to his reputation, to my reputation, to the reputation of the board of directors and that of Ken Lay. Our reputations were ruined by what happened to the company and the treatment of what happened by the press. He believed we were creating a great company, doing good things. Seeing a lifetime of work denigrated, as it was in the press, was very painful to Cliff.”

Skilling said he spoke to Baxter for three hours about a week and a half before he died (see NGI, Jan. 28). He summed up Baxter’s mood as “very angry. He told me, ‘It’s like this: it’s a beautiful day in Houston, Texas. You’re in your front yard with a hose…watering your lawn. The neighbors are out talking to one another, and all of a sudden the guy next door bursts out of his front door, walks up to you and says, so everyone can hear — I hear you’re a child molester. Then he walks back inside his house and closes the door. They’re calling us child molesters and that will never wash off,'” Skilling recalled Baxter saying.

Skilling is the most senior Enron executive to testify before Congress so far. All other top officials — Fastow; former Enron officer Michael Kopper; Causey; and Buy — have invoked their rights under the Fifth Amendment to avoid self-incrimination. It was not clear whether Lay will do the same when he appears before Congress this week. With the exception of Lay, all were trotted before the subcommittee last Thursday, but they were quickly dismissed once it became clear that they intended to plead the Fifth to every question.

Fastow had planned to testify before the House subcommittee Thursday, but he had a “change of heart” after the blistering Enron report — the so-called Powers Report — concluded that the former CFO had a significant hand in the downfall of Enron, a spokeswoman for the House panel said.

Mintz said he hired a New York law firm to review the Enron partnerships in the spring of 2001, citing his concerns about the LJM transaction and Fastow’s role in it. “I wanted to get my arms around what was going on,” he told the subcommittee, adding that he chose an outside law firm because he wanted “somebody who had no linkage to the company.” Copies of the law firm’s report have been turned over to Enron, the Securities and Exchange Commission, the Federal Bureau of Investigation and House investigators, Mintz said.

He said he tried to meet with Skilling about the partnerships, but was told “Jeff was very fond of Andy, so don’t go there.” Nevertheless he sent a memo to Skilling requesting a meeting and identifying his concerns, he said, he but never got an answer. “I just dropped it” after that.

In his March 2001 meeting with Skilling, McMahon, who at the time was company treasurer, said he told Skilling that the LJM situation was “untenable for myself and my group.” Skilling’s “parting words to me was that he understood [my] concerns.” McMahon said he “naively” believed at the time that things would get better in the company. Instead, McMahon — at the strong urging of Skilling — was reassigned, he said.

Mintz also said he voiced his concerns about the partnerships to Causey and Buy. The two men still are employed by Enron, but they may not be for long. The company’s board of directors is expected to meet this week to decide their future with Enron.

In related developments last week, Lay canceled scheduled, much-anticipated appearances before two congressional panels after lawmakers made what his attorney said were “particularly disturbing” and “inflammatory” comments that suggested the hearings would take on a “prosecutorial” tone. The Senate Commerce Committee and the House Financial Services Committee quickly issued subpoenas for Lay to appear on Feb. 12 and Feb. 14, respectively.

Lay’s actions also came on the heels of the release of a damning report prepared by a special investigative of Enron’s board of directors, which found that said Lay, as well as other senior management officials, the board and the company’s outside auditor, contributed to the financial collapse of the energy trader last fall.

Responding to the scathing special investigative report, House Energy and Commerce Chairman W.J. “Billy” Tauzin (R-LA) said the case against Enron “may clearly end up being [securities] fraud.” He suggested that “maybe somebody ought to go to the pokey for this” financial debacle.

The report found that Enron “officers — all the way to the board of directors — have some responsibility. In fact, the report even targets Ken Lay. [It] said he had a responsibility as supervisor of these offices to know what was going on,” Tauzin said. The blame for the company’s failure “goes all the way to the top.”

The internal document “suggests massive problems” existed at Enron, Sen. Dorgan agreed, adding that the energy trader encouraged “almost a culture of corporate corruption.” Clearly, “some things have happened here that are going to put some people in real jeopardy and trouble,” he said, when asked if Senate investigators had uncovered any evidence of criminal behavior. He noted the special investigative report estimated $1 billion in profit “was booked…that didn’t exist” by Enron.

The exhaustive, 218-report said all of the major players — Lay, Skilling, Fastow, the board of directors, and Enron’s former outside auditor Arthur Andersen LLP — either directly or indirectly had a hand in the breakdown of the company and its slide into bankruptcy last December, which put thousands of Enron employees out of work, and robbed employees and investors of billions of dollars in stock value.

Known as the “Powers Report,” because the investigation was led by University of Texas Law School Dean William Powers, the report concludes that not only top Enron executives, but others under Fastow’s jurisdiction and members of Fastow’s family, enriched themselves at Enron — and Enron shareholders’ — expense. Besides Powers, other board members contributing to the investigation and the report were Enron board members Raymond S. Troubh and Herbert S. Winokur Jr.

The report does not conclude, but hints, that laws may have been broken by some Enron employees. “Our investigation identified significant problems beyond those Enron has already disclosed,” it said. “Enron employees involved in the partnerships were enriched, in the aggregate, by tens of millions of dollars they should never have received — Fastow by at least $30 million, Kopper by at least $10 million, two others by $1 million each, and still two more by amounts we believe were at least in the hundreds of thousands of dollars. We have seen no evidence that any of these employees, except Fastow, obtained the permission required by Enron’s Code of Conduct of Business Affairs to own interests in the partnerships. Moreover, the extent of Fastow’s ownership and financial windfall was inconsistent with his representations to Enron’s Board of Directors.

“This personal enrichment of Enron employees, however, was merely one aspect of a deeper and more serious problem. These partnerships — Chewco, LJM1 and LJM2 — were used by Enron management to enter into transactions that it could not, or would not, do with unrelated commercial entities. Many of the most significant transactions apparently were designed to accomplish favorable financial statement results, not to achieve bona fide economic objectives or to transfer risk.” Some transactions, said the report, did not follow applicable accounting rules.

The way transactions were implemented “allowed Enron to conceal from the market very large losses resulting from Enron’s merchant investments by creating an appearance that those investments were hedged — that is, that a third party was obligated to pay Enron the amount of those losses — when in fact that third party was simply an entity in which only Enron had a substantial economic stake. We believe these transactions resulted in Enron reporting earnings from the third quarter of 2000 through the third quarter of 2001 that were almost $1 billion higher than should have been reported.” The entire report is available for review on the web site of the U.S. Bankruptcy Court of New York at www.nysb.uscourts.gov/.

Despite the findings by the Enron special investigative committee that top company officials used the controversial off-the-book partnerships for self-enrichment gains, Powers refused to say last week that the activities of Enron executives rose to the level of criminal securities fraud.

“My only hesitation is that fraud requires [proof of] a certain state of mind” of the alleged perpetrators, Powers told the House Energy and Commerce subcommittee during its first hearing last Tuesday.

But, he said, Enron top-level management participated in a “systematic and pervasive attempt” to misrepresent the financial condition of the company through a web of “extremely complex” partnership transactions, which he noted were created by using the company’s own assets and credits, and whose chief objectives were to conceal debt, inflate earnings and enrich the executives.

Powers believes that Fastow, who has been dubbed “Fast Andy” by some, played a major role in Enron’s downfall. “If Mr. Fastow had been doing his job correctly,” he said, there is a “substantial” chance that Enron’s financial train wreck would never have happened. Fastow seems to be the “Betty Crocker of cooked books,” quipped subcommittee Chairman Greenwood.

“What we found was appalling,” Powers told the House subcommittee.

“How can anyone look at [this], and conclude that the FBI doesn’t need to be over there with…handcuffs?” asked Tauzin, one of the lead House investigators into the Enron scandal.

Powers and the committee conducted a series of interviews with the central figures in the unfolding scandal over a three-month period, culminating with the release of the report on Feb. 2. Powers offered the House subcommittee a detailed assessment of each figure, including:

“Much more needs to be done” to get to the bottom of the Enron financial debacle, Powers told the House panel, adding that his committee’s report was just a starting point. The committee did not have subpoena power, he said, and could only skim the surface in many areas.

House leaders embrace an extensive investigation of the Enron irregularities, but they are at odds over whether this is an isolated event. Tauzin said he believes the Enron debacle represents “an old-fashioned example of theft by insiders and a failure of those responsible to prevent that theft.” He called Enron a “huge aberration,” which was not indicative of the rest of corporate America. He said the House Energy and Commerce Committee should first find out where current rules and laws were violated before imposing new rules. In the past, Tauzin — who received nearly $60,000 in campaign contributions from Arthur Andersen, according to BusinessWeek — has opposed more stringent accounting standards.

But Rep. John Dingell (D-MI), the committee’s ranking member, sees the Enron-style accounting problems as being more widespread, and said he intends to pursue legislation to improve the accountability of companies and their auditors.

In another related development, Tauzin said last Wednesday he asked Rep. Joe Barton (R-TX), chairman of the energy and air quality subcommittee, to suspend further action on his panel’s electricity deregulation legislation until congressional investigators can “thoroughly understand” the impact of Enron’s collapse on the energy markets. Barton is expected to hold a hearing this week on Enron’s impact on the energy industry.

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